A ‘stateless’ currency would be a globalist’s fantasy. It could also be dangerous, says Sreejani Bhattacharyya
Bitcoins have become the hottest investment class in recent times and ever more Indians have been investing in them. And why not? The value of a bitcoin hit an all-time high on 29 November last year when it crossed the $11,000 mark, doubling its value in just one month!
Says Sahil Raaj Kapur, a small-time investor in bitcoins, “I invested in October 2017 when the rate was close to Rs. 4.9 lakh a bitcoin and purchased Rs. 1,000 worth of bitcoin just to get into the market. Once we had a proper way of investing then it was easy for me to monitor. I used the Zebpay app which is authentic and my PAN, Aadhaar and bank account are all linked to it, so it is also legitimate. But I would not advise you to invest in bitcoin since government intervention is causing the rate to drop drastically.”
Kapur’s concerns are justified. Finance minister Arun Jaitley, while presenting this year’s budget on February 1, categorically stated, “We will take all measures to eliminate use of cryptocurrencies in financing illegitimate operations.” He said he, however, looks forward to the use of blockchain technology, which is the foundation of all cryptocurrencies, in the future as it would lead to better maintenance of financial records.
As the late monetary economist and free-market champion, Milton Friedman once said, “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that is missing but that will soon be developed is a reliable e-cash.”
So, what exactly is a bitcoin? It’s is a digital currency that, like any other kind of money, can be exchanged to procure goods or services from vendors who accept bitcoins as a mode of payment. It isn’t issued or backed by any government or central bank. All transactions take place directly between users. The roots of bitcoin remain unknown. What’s known is that its origin lies with an unknown group or person using the name Satoshi Nakamoto, who released it as open-source software in 2009.
As the website How to Geek explains, “Bitcoins are blocks of ultra-secure data that are treated like money. Moving this data from one person or place to another and verifying the transaction, i.e. spending the money, requires computing power.
Users, called “miners”, allow their computers to be used by the system to safely verify the individual transactions. Those users are rewarded with new Bitcoins for their contributions to the network. Those users can then spend their new Bitcoins on goods and services, and the process repeats.”
According to Bitcoin.org, “As a new user, you can get started with Bitcoin without understanding the technical details. Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa.”
“The blockchain is a shared public ledger on which the entire bitcoin network relies. All confirmed transactions are included in the blockchain network. This way, the bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.”
The blockchain is a ‘distributed ledger’ which allows anybody to view and verify a transaction involving bitcoins but not modify it in any way.
Thus, it provides a transparent and permanent record of bitcoin transactions. Yet, bitcoins have become almost synonymous with the words ‘hidden’ or anonymous transactions.
As The Sun newspaper commented in December 2017, bitcoins are linked to a range of serious crimes as the users are anonymous in this payment system. “Within minutes of logging on to the Dark Web — an encrypted corner of the internet that can only be accessed by special browsers — we found organised criminals offering a chilling array of services.
For payment in Bitcoin, we could get a computer hacker to ‘destroy a business or a person’s life’, buy drugs, passports, cloned credit cards and counterfeit money or even order acid attacks, rape and murder.” What explains this anomaly? As cryptocurrencies.com explains, “Contrary to popular belief, Bitcoin is not, strictly speaking, anonymous. In fact, it’s pseudonymous; your identity is tied to a fake name (or pseudonym).
With bitcoin, this fake name is simply your ‘public key’, a long string of numbers which acts as your bitcoin address. So, bitcoin provides more anonymity than other electronic payment systems run by third-parties. Your bitcoin possession and transactions aren’t tied to your real name, your email, or your physical address – only your randomly-generated bitcoin address.
Your anonymity isn’t compromised unless someone can connect your bitcoin address to your real-world identity, says Sharan Nair, vice president, marketing at Unocoin. “In Bitcoin-wallet companies, when a person opens an account, his/her identification details like PAN card is taken so that if something illegal happens that can be tracked.But a bitcoin-trading account can be opened without the help of any wallet like ours. That is where the account becomes anonymous and can be used for illegal activities.”
As early as December 2013, the Reserve Bank of India (RBI) had issued a press release cautioning “users, holders and traders of virtual currencies (VCs), including bitcoins, about the potential financial, operational, legal, customer protection and security- related risks that they are exposing themselves to.”
The RBI has repeated its warning four years later, saying, “The creation, trading or usage of virtual currencies including bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.”
Says Dr Prabirjit Sarkar, former head of the department of economics at Jadavpur University, Kolkata, “RBI should ban it as the monetary authority has no control over it. Criminal and speculative activities are determining its price. It is very volatile and holding it for investment purpose is dangerous for the layman.”
Nagaraj P B, another small-time investor says, “As the crypto world is volatile, investments are subject to the risk. Hence my advice to all investors would be, invest what you can afford to lose. Investing in cryptocurrencies involves very high risk, as prices have been extremely volatile.
Many experts are sceptical about using bitcoin as an investment primarily because there is nothing for them to analyse. Since these cryptocurrency prices are not regulated, as more people enter the market lured by the high prices, the prices climb ever higher. This might lead to the formation of a bubble that will eventually burst and cause widespread losses.”
Jamie Dimon, CEO of global investment bank JP Morgan, expressed his doubts over the value and credibility of bitcoins. He said, “It is worse than tulip bulbs (the subject of one of the greatest financial bubbles of all time). It won’t end well. Someone is going to get killed.”